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Suppose 1 year Treasury-bills were currently yielding 5.5%. Also suppose that a bank estimated that a particular loan applicant had a 30% chance of defaulting on a one year loan and that in the event of default the bank would recover only 25% of its scheduled payment of principle (estimated net proceeds of the sale of collateral). What interest rate would the bank have to charge to earn an expected rate of return on its loan equal to the T-bill rate?

Econometrics, Economics

  • Category:- Econometrics
  • Reference No.:- M9482078

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